By Lawrence Buettner
SVP Product Innovation
Treasury 3.0 represents a challenge for both banks and practitioners. David Waltz’s article, Treasury 3.0 from a Practitioner's Perspective: Opportunities and Challenges, laid out the challenges for corporate practitioners. The challenges faced by banks are no less daunting. Treasury Strategies appropriately projects, since we are just entering the 3.0 phase, characterized as “payment and liquidity solutions offered by banks, as opposed to specific product sets put together by companies”, it will take time for the results to be realized.
In their article Treasury 3.0: Challenges and Solutions, Treasury Strategies has articulated well the maturation of bank provided treasury services over the last 40+ years. They ably point out that much progress has been made during this period. Efficiency has improved tremendously and yet the sophistication of treasury services, by their 3.0 definition and most other yardsticks, remains rather rudimentary.
The challenge for most banks is how to remain relevant to their customers in providing state-of-art treasury services as the pace of innovation quickens by the largest banks and other non-bank providers, namely ERP and other non-bank treasury services providers.
Banks are faced with a number of challenges in meeting the needs of their corporate customers.
Regulatory Burden- it has been well chronicled the amount of regulatory burden imposed on banks as a result of Dodd-Frank and other legislated changes as the result of the fallout of the “great recession”. These burdens are being felt by banks in their cost for compliance. Compliance is diverting funding from the development of new products into the remediation of existing platforms, products and services to address regulatory mandates. The amount of discretionary R&D funding available for new customer facing products is thus scarce, in an industry where R&D expenditures are already historically low[i].
Historical Impediments- the development of Treasury 2.0 bank cash management products was a dis-jointed, fast-paced process in reaction to competitive pressures. Products were invented and developed utilizing disparate technologies and architectures. Today’s larger-bank architectures are a collection of single purpose product platforms bound together by extensive spaghetti-code interfaces to deliver services to customers. The silo nature of the systems makes it difficult for banks to effectively rise to the Treasury 3.0 challenge for combining payment and liquidity products.
Industry Consolidation- the U.S. bank industry consolidation has created unintended consequences well beyond Too Big To Fail (TBTF). The scale achieved by the largest bank treasury service providers has impacted the rest of the industry’s ability to justify the costs to remain competitive.
Industry consolidation has also created new larger players, who until recently were viewed as smaller regional banks, who must now re-tool their back offices to address scale and product feature gap issues, if they want to be perceived as viable treasury services providers.
Clearly, no top-50 U.S. bank can afford the time, cost and risk to rip and replace multiple systems to facilitate the Treasury 3.0 end-state. Without a thoughtful strategy, all banks stand to be further dis-intermediated by non-bank providers and be left with true commodity products and prices. Lacking the scale of the largest treasury services banks, smaller banks are going to be faced with the hard questions raised by Treasury Strategies: “the life cycle decision, the business driver decision, and the value proposition decision” as they struggle to fund products to remain competitive.
Then how do the largest banks make progress and the smaller players afford to remain competitive? To compete, all banks need to develop products with a three dimensional view:
- Aggregation – avoid the need for replacing product factories through aggregation of data into central data stores; thus reducing the integration burden.
- Automation – customer facing products need to be more than web accessed “list-reports” but be enabled by rules engines and workflow that easily meld into the back office of clients.
- Acceleration – no longer defined as speed of transaction processing but the ability to harness the underlying data and provide constructive insight so that customers can better manage their business.
If technology were the only hurdle faced by banks, the task would be manageable for most. The fundamental hurdle for all banks may be cultural organization inertia. The silo bank product factories used for delivery of treasury services also restricts line-of-business and product managers thinking across the organization to develop the products envisioned in the “3.0” world. A new breed of thought-leaders, who have the ability to become span breakers, are required to convince executives to make the required investments as the industry goes through transformation.
To create momentum toward Treasury 3.0 product delivery, banks will also need to look externally to form new partnerships with thought-leaders and providers who understand that tomorrow’s products are no longer solely defined by “feeds and speeds” but integration and innovation. The payment and liquidity product combinations envisioned in Treasury 3.0, in which banks are the integrator, not the company, will stretch the boundaries of current bank services into the back office of the corporate customer. This is an area that banks have dealt only on the periphery.
In the treasury services industries with an annual spend of $1 trillion, non-bank providers, unburdened by compliance and regulation; stand to reap the largest rewards in the Treasury 3.0 world. Banks need to figure out how to develop thought-leadership, partnerships and allocate the resources necessary for change.